FYI | Jul 24 2019
By Peter Switzer, Switzer Super Report
Anyone who has watched or read me for years knows I don’t punt on companies. I do take the advice of respected stock analysts. Sometimes, for example, with my BHP call in the $14 region, I’ll take a three-year speculation on a quality company that has been over-beaten-up by an irrational, too punishing market.
You have to remember a lot of momentum on stocks is driven by short-term haters and lovers of companies, which creates an opportunity. It’s why I think Link (LNK) looks like a decent longer-term play. But that’s for another day.
Today I want to go back to my often talked about strategy of using ETFs when you’re looking at a buying opportunity. The three in question target three areas worth taking a punt on for good historical reasons.
The first is an ETF that captures a stocks’ sector — small caps — that’s likely to benefit from a post-trade war truce. Cyclical stocks and more risky companies should be beneficiaries of that time when rotation out of dividend-paying and big cap, bond-proxy stocks begins. Instead of picking individual stocks, an exchange traded fund that picks up 200 small cap companies could be the ticket. The chart below shows the iShares ISO exchange trades fund over five years. The high was hit before the mid-2018 sell off at around $5.35 and it’s currently at $4.96. So if the trade war truce brings expected optimism, taking out $5.35 would bring a 7.8% gain on top of a dividend yield of 2.39%.
And by the way, I’d expect a bigger rebound in ISO that would take it beyond $5.35.
The next ETF is Trump-related and it’s IZZ that taps into the big cap Chinese stocks. I talked about this on TV before they closed the Your Money channel earlier in the year. It has lifted but with delays in the China trade talks it has gone off the boil, as the chart above shows.
The high in 2018 was $65.55. It went as low as $56.30 by mid-2018 and got to $61.89 in June, when a trade deal was looking more likely. It has since fallen away to $60.40. A return to the old high would net 8.5%. But once again, I’d expect a big bounce back, when Donald and Xi Jinping shake hands over a dumpling or two!
Here are the top holdings on IZZ:
Here’s IZZ’s performance in a nutshell:
My final exciting ETF (and I can’t believe I’m saying this) is GOLD! I’ve never invested in gold but if I did, I’d do it through the ETF Securities’ Physical Gold product, with the great ticker code (GOLD).
It’s designed to offer investors a simple, cost-efficient and secure way to access gold by providing a return equivalent to the movements in the gold spot price less the applicable management fee.
The website tells us that “GOLD is backed by physical allocated gold held by HSBC Bank plc (the custodian). Only metal that conforms with the London Bullion Market Association’s (LBMA) rules for Good Delivery can be accepted by the custodian. Each physical bar is segregated, individually identified and allocated.”
“GOLD is an Exchange Traded Commodity (“ETC”) that can be created and redeemed on demand (by market makers). It trades on the ASX just like an equity, it’s settled and held in ordinary brokerage accounts and its pricing and tracking operates similarly to an Exchange Traded Fund. No new securities can be issued until the bullion is delivered to the Custodian’s vault. There is no credit risk within this product.”
But after decades of dodging gold as an investment alternative, why am I thinking about going for gold?
Well, one of the world’s best investors with a very good algorithm is Bridgewater Associate’s Ray Dalio, who is now talking up gold. And he’s joined Goldman Sachs, Citigroup and Morgan Stanley, which have all gone for gold recently.
Right now, a number of developments are helping gold bugs get their overdue rewards. Why? Try these:
- Central banks are also getting in on the act buying bullion.
- The prospect of slowing economies.
- Central banks lowering interest rates.
- Rising global tensions.
“Gold, which benefits from low rates because it doesn’t pay interest, has since late May generated the best returns in the Bloomberg Commodity Index,” Bloomberg.com revealed on Friday. And as I always say, the trend is your friend until it bends and bending time is a fair way off on my reckoning.
Adding weight to the gold case is Market Timing Australia which maintains a “buy gold” strategy for its world rotation strategy.
“According to Dalio… stimulus from central banks that’s helped bolster asset prices is nearing its limit and having diminishing effects on economies. Such stimulus will lead to more negative real and nominal returns, spurring investors to seek alternative forms of money such as gold or other stores of wealth,” Bloomberg reported.
But wait there’s more from Bloomberg: Dalio “sees a coming ‘paradigm shift’ in the next few years as an enormous amount of debt and non-debt liabilities such as pension and health care comes due and can’t be funded with assets. That will lead to “some combination of large deficits that are monetized, currency depreciations, and large tax increases.
“Assets ‘that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,’ Dalio said.”
I think this is a fair explanation of what will also kill the bull market in a couple of years’ time. It’s why I want to encourage many of you to go defensive and try to build up your income streams.
Getting into gold now for a big pay off in a year or two looks like an OK play for a long-term investor.
My first two ETFs should benefit from a trade war truce over the next year but the gold one is a future investment that might take time to deliver. But as all markets crash and recessions are inevitable, it should not only be rewarding, it should provide some insurance.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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